Goldcorp Raids the Gold Vault

Acquisitions help the gold miner's second quarter shine.

Goldcorp(NYSE:GG) is not your average gold miner. Expecting higher gold prices, the company has stockpiled mined gold instead of turning it into quick cash. It also recently completed a massive $1.9 billion merger (in stock) with Wheaton River Minerals to create what the company describes as the "world's lowest-cost and fastest-growing million-ounce gold producer."

In 2005, Goldcorp's gold production is expected to exceed 1.1 million ounces at a cash cost of less than $60 per ounce; by 2007, production is expected to grow to more than 1.6 million ounces. The company has a strong balance sheet, with $421 million in cash and equivalents, no debt, and no hedging -- and it recently arranged a $500 million credit facility for more acquisitions.

The company's second quarter was outstanding. Gold production doubled, thanks to the Wheaton acquisition, and net income increased tenfold to $98 million. Of that increase, $52 million came from the sale of the company's gold bullion stockpile.

Since the third quarter of 2001, Goldcorp has been stockpiling a portion of its annual gold output in anticipation of higher gold prices. In the second quarter of 2002, the company expanded its program to include open market gold purchases. By the end of March 2005, this $33.6 million investment was worth $117.9 million -- reflecting the strong rise in the price of gold.

When the company announced in March the acquisition of the Bermejal gold deposit in Mexico, it also announced that it would terminate its gold stockpiling program. Figuratively speaking, the company said it was converting its 240,000 ounces of refined gold into 2.4 million ounces in the ground -- by financing the acquisition with gold held within its vaults. It also converted a big balance sheet asset into a profitable -- but taxable -- sale.

Goldcorp is an interesting investment. Analysts expect the company to earn $0.69 a share this year and next year -- pricing the stock at 26 times forward earnings, next to 23% projected growth rates. But who knows what price gold will be at in five days, let alone two years? Also of concern is that although the company's unwillingness to enter into hedging arrangements will presumably offer a significant upside during good periods, it risks a downside during periods when commodity prices lull.

But consider this. The company is planning to increase gold production by 45.5% between 2005 and 2007. In addition, the recently acquired Bermejal gold deposit bodes well for even longer-term production.

Industry biggies Newmont(NYSE:NEM), Barrick(NYSE:ABX), and Placer Dome(NYSE:PDG), respectively, sell for 34.7, 41.4, and 39.8 times forward earnings and have projected five-year growth rates of 5.0%, 12.5%, and 11.7%. Take these companies' comparatively inflated prices and Goldcorp's excellent production prospects, and you'll see that Goldcorp appears to be relatively well-positioned.

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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.